US Supreme Court Curbs Patent-Holder Power to Block Resale
- Author: Zachary Reyes May 31, 2017,
May 31, 2017, 15:38
Lexmark disagreed, arguing that: (1) because U.S. patent laws only prevent infringing activities in the U.S., Lexmark's foreign sales did not exhaust its patent rights; and (2) because Lexmark clearly communicated the restrictions on post-sale use or re-sale, Impression Products' importation of refurbished cartridges -whether initially sold in the U.S. or abroad- was "without authority", and therefore infringing. Slip Op.at 11. With these two pronouncements, the Supreme Court has in one swoop both simplified patent law and added new complexities, challenges and opportunities to the innovation ecosystem.
Eric Smith, president of Impression Products, said the ruling vindicates the company's business model. Advocates of parallel importation - this author included - have pointed to the pro-competitive effects inherent in cross-border trade in pharmaceutical products once patent rights have been exhausted. Pharmaceutical originators have argued that anything that decreases their profits hurts R&D, a position which taken to its logical conclusion justifies unlimited price increases. "We conclude that a patentee's decision to sell a product exhausts all of its patent rights in that item, regardless of any restrictions the patentee purports to impose or the location of the sale". But in the modern era of microchips and DRM, some usage restrictions are suddenly enforceable long after an original item is sold. In this case, Lexmark sold patented ink cartridges under a customer "Return Program", that provided for a significant price discount under the condition that buyers use the cartridges only once, and refrain from transferring the spent cartridges to anyone but Lexmark. Back then, the company lost in part because the very simple software in its printer cartridges (a 12-byte program!) didn't rise to the level of a copyrightable work. But the viability of those workarounds is unclear given the scope of the Court's holding, as well as Federal Circuit precedent equating a covenant-not-to-sue with a patent license for purposes of patent exhaustion. By its ruling, the Court provided a bright line rule regarding patent exhaustion: once a patent owner has sold its patented product, it can not use patent law to restrict post-sale use or re-sale of the product, regardless of where the sale occurred or whether the restrictions were made clear at the time of sale. Although the post-sale restriction may be enforceable against the original purchaser under contract law, Lexmark can not enforce the restriction under patent law. "The business works because the shop can rest assured that, so long as those bringing in the cars own them, the shop is free to fix and resell those vehicles".
But, Roberts continued, "That smooth flow of commerce would sputter if companies that make the thousands of parts that go into a vehicle could keep their patent rights after the first sale".
The ruling is expected to demystify the "cloud of uncertainty" for downstream purchasers/ licensees and end-users of patented components in the global market who risked continuing liability for infringement even after authorized sales to consumers occurred.
"Extending the patent rights beyond the first sale would clog the channels of commerce, with little benefit from the extra control that the patentees retain", wrote Chief Justice John Roberts. "And advances in technology, along with increasingly complex supply chains, magnify the problem", Roberts notes. Lexmark's contract with buyers includes a right to sue for patent infringement, but the court rejected the company's use of patent law to attempt to control ownership rights of a person who purchases the product.
Justice Ginsburg, the lone dissent, concurred with the part of the Court's ruling regarding exhaustion domestically, but disagreed that USA law could necessarily hold when it comes to foreign sales.
Good news, tinkerers: now you can do what you like to your devices without fear of patent-defying blowback. And manufacturers often try to place restrictions on reselling digital goods, fix markets, and other uses that the law has traditionally allowed customers to engage in. Or, rather like all the printer companies, they ignored it and sued cartiridge fix companies to keep their consumerable ink profits high.